The Retail Store Lease: Assignment, Percentage Rent and Buying the Building
For many independent stores, the location is part of what a buyer is paying for. Customers know where to find the shop, neighboring businesses bring in foot traffic and the space is already fitted with displays, lighting and signage. That makes the retail store lease one of the most important documents in an acquisition. If the buyer cannot secure the location on workable terms, much of the store’s value may be at risk.
This article is general information for buyers of existing, operating specialty retail stores. Lease law and landlord practices vary by state and by property, and every lease is different. Buyers should have the lease reviewed by a qualified real estate attorney. Nothing here is legal, tax or financial advice.
Assignment and Landlord Consent
Many retail leases require the landlord’s consent before the lease can be assigned to a buyer or before ownership of the tenant entity changes. Some allow the landlord to withhold consent, ask for new financial information, require a personal guaranty from the buyer, adjust rent or charge a fee. Buyers should learn early what the landlord will require, since lease consent is frequently a closing condition. In some cases a new lease with the buyer may be negotiated instead of an assignment.
Remaining Term and Renewal Options
Lenders frequently want the lease term, including renewal options, to cover a meaningful part of the loan’s repayment period. A store with little time left on its lease may need an extension or new lease before financing can move forward.
Provisions Specific to Retail Leases
- Percentage rent: additional rent based on sales above a set level, which affects cash flow and requires sales reporting to the landlord
- Co-tenancy: terms that may adjust rent or allow the tenant to leave if key neighboring tenants close, along with any conditions on those rights
- Use clause: limits on what the store may sell, which can restrict changes to the merchandise mix
- Exclusive use: protection against the landlord leasing nearby space to a direct competitor
- Operating covenants: required store hours or a requirement to stay open
- Common area charges: shared costs for maintenance, taxes and insurance, which may change over time
- Relocation rights: whether the landlord can move the store within a shopping center
Each provision can affect what the store is worth and whether the buyer’s plans are allowed. Our retail store due diligence checklist includes the lease documents to request.
Personal Guaranties
The seller may have personally guaranteed the lease. Landlords frequently ask buyers to provide a new guaranty, and sellers will want to be released from theirs. Both points should be negotiated and documented.
Buying the Building Instead
Sometimes the seller owns the store’s building and offers it with the business, or the landlord is willing to sell. Owning the real estate can provide long-term control over the location and occupancy costs, but it requires more capital and adds property responsibilities. Buyers should consider the building’s condition, how much space the store actually uses, whether there are other tenants and whether the property fits their long-term plans.
Financing options for an owner-occupied store building may include SBA 504 business real estate loans or conventional real estate loans, depending on eligibility, program rules and lender review. Some buyers finance the business and real estate together; see our guide to SBA loans for retail stores.
Where the Lease Fits in the Process
Because lease issues can delay a closing, buyers frequently contact the landlord, with the seller’s cooperation, soon after signing a letter of intent. Our guide on how to buy a retail store shows where the lease fits among the other steps.
US Professional Funding helps buyers finance the acquisition of existing, operating retail stores, including transactions that involve the store’s real estate. Learn more about our retail business acquisition financing.
